Foreign exchange or “Forex” as it has become known, can be defined as a network of buyers and sellers, who transfer international currency between each other at an agreed price. The general people, companies and central banks convert one currency into another in this manner. You have probably travelled abroad at some stage, and, chances are you have also made a forex transaction as well, but probably for practical purposes. This is a large purpose of Foreign exchange, however the vast majority of currency conversion is undertaken to earn a profit. Much of the Forex trading today is moving in the direction of becoming computerized and technological. Bots can be used to facilitate and assist in this field, and thus we will also take a look at the world of Bot trade and describe its types and functions.
How do currency markets work?
Forex trading takes place directly between two parties…
Unlike shares or commodities, forex trading does not take place on exchanges but directly between two parties, in an (OTC) market. The forex market is run by a global network of banks, spread across four major forex trading centres in different time zones: London, New York, Sydney and Tokyo. Because there is no central location, you can trade forex 24/7. Most traders make exchange rate predictions to take advantage of price movements in the market instead of planning to take delivery of the currency itself.
There are three different types of forex market…
- Forward forex market
A contract is agreed to buy or sell a set amount of a currency at a specified price, to be settled at a set date in the future or within a range of future dates. This is actually not a legally binding contract.
- Spot Forex market
This is the physical exchange of a currency pair, which takes place at the definite point of trade settlement (“on the spot”), or within a short period of time.
- Future forex market
A contract is agreed to buy or sell a set amount of a currency at a set price and date in the future. Unlike forwards, a futures contract is legally binding.
What is a base and quote currency?
The price of a forex pair is how much one unit of the base currency is worth in the quote currency. A base currency is the first currency listed in a forex pair, while the second currency is called the quote currency. Forex trading always involves selling one currency to buy another, which is why it is quoted in pairs.
There are three-letter codes for each currency, which is usually made up of two letters that stand for the region, and one standing for the currency itself. For example, JPY/USD is a currency pair that involves buying the Japanese Yen and selling the US dollar.
Let’s look at an example; JPY is the base currency and USD is the quote currency. If JPY/USD is trading at 1.12101, then one Yen is worth 1.12101 Dollars.
If you think that the base currency in a pair is likely to strengthen against the quote currency, you would buy the pair. If you think it will weaken, you can sell the pair. This is because if the base (Yen in this example) rises against the Dollar, then a single Yen will be worth more Dollars and the pair’s price will increase. If it drops, the pair’s price will decrease. This is why Forex trading is heavily based on predictions on the basis of economic, political and industrial analysis of the countries.
What forces move the forex market?
Like most financial markets, forex is also primarily driven by the forces of supply and demand and it is important to gain an understanding of the influences that drives price fluctuations here.
- Central banks
Supply is controlled by central banks of countries, who can announce measures that will have a significant effect on their currency’s price. Increasing liquidity; injecting more money into an economy can be a cause for the drop in the currency’s value.
- News reports
Commercial banks and other investors tend to want to put their capital into economies that have a strong outlook. So, if a positive piece of news hits the markets about a certain region, it will encourage investment and increase demand for that region’s currency. The opposite is similarly also true then; a piece of negative news can cause investment to decrease and lower a currency’s price. This is why currencies tend to reflect the reported economic health of the region they represent.
- Market response
This is the market’s reaction to the news, which can also play a major role in driving currency prices. If traders believe that a currency is headed in a certain direction, they will trade accordingly and may convince others to follow suit, increasing or decreasing demand.
- Economic data
Economic data is integral to the price movements of currencies; it indicates how an economy is performing, and it offers insight into what its central bank might do next.
- Credit ratings
A country’s credit rating is an independent assessment of its likelihood of repaying its debts. A country with a high credit rating is seen as a safer area for investment than one with a low credit rating. This often comes into particular focus when credit ratings are upgraded and downgraded. A country with an upgraded credit rating can see its currency increase in price, and vice versa.
Investors will try to maximize the return they can get from a market, while minimizing their risk. So alongside interest rates and economic data, they might also look at credit ratings when deciding where to invest.
How does forex trading work?
Forex Trading works by simultaneously buying one currency while selling another. Traditionally, a lot of forex transactions have been made via a forex broker, but with the rise of online trading, you can obtain information on forex price movements using tools like CFD trading.
- Forex “lots”
Currencies are traded in lots, sets of currency used to standardize Forex Trades. As Forex tends to move in small amounts, lots tend to be very large: a standard lot is 100,000 units of the base currency. So, because individual traders won’t necessarily have 100,000 Dollars (for example) to place on every trade, almost all Forex Trading is leveraged.
What is margin in forex?
This is the term used to describe the initial deposit you put up to open and maintain a leveraged position. When you are trading forex with margin, remember that your margin requirement will change depending on your broker, and how large your trade size is.
Margin is usually expressed as a percentage of the full position. So, a trade on EUR/GBP, for instance, might only require 1% of the total value of the position to be paid in order for it to be opened. So instead of depositing AUD$100,000, you’d only need to deposit AUD$1000.
What is a pip in forex?
Pips are the units used to measure movement in a forex pair. A forex pip is usually equivalent to a one-digit movement in the fourth decimal place of a currency pair. So, if GBP/USD moves from $1.35361 to $1.35371, then it has moved a single pip. The decimal places shown after the pip are called fractional pips, or sometimes pipettes.
Trading bots are computer programs that use various indicators to recognize trends and automatically execute trades. Trading bots for private investors first appeared in the foreign exchange trading space and they have quickly made their way into the crypto asset market.
Forex trading robots
These are automated software programs that generate trading signals. Most of these robots are built with MetaTrader, using the MQL scripting language, which lets traders generate trading signals or place orders and manage trades.
Automated forex trading robots are available for purchase over the Internet, but traders should exercise caution when buying any such trading system. Whenever you give your money to a third party — be it a fund manager or a trading software — you are taking a risk. In the case of trading bots that are only a few years old and are being used in an immature illiquid market, the risks are even higher. Additionally, there are the added risks of potentially faulty software, heavy losses due to flash crashes and falling victim to a scam;
- Faulty Software
If you are choosing a poorly coded trading bot that has a subpar or even faulty software, you will likely end up losing money using the bot. Hence, you should only choose bitcoin trading bots with the best reputations that offer the type of trading tools that you require.
Flash Crashes: In the case of a flash crash, as was witnessed in ether (ETH) on GDAX back in June 2017, trading bots can lead to heavy losses in seconds if users have not set stop-loss limits on their trades. Flash crashes occur more often than one may think in the relatively illiquid and still largely unregulated world of cryptocurrencies and this poses a risk to those who let trading bots automatically execute trades for them.
Often, companies will spring up overnight to sell trading systems with a money-back guarantee before disappearing a few weeks later.
The companies are not legitimate systems for assessing risk and opportunity. They may cherry-pick successful trades as the most likely outcome for a trade or use curve-fitting to generate great results when backtesting a system but are not legitimate systems for assessing risk and opportunity.
- Ineffective on the long run
Another criticism against forex trading robots is that they generate profits over the short term but their performance over the long term is mixed. This is primarily because they are automated to move within a certain range and follow trends. As a result, a sudden price movement can wipe out profits made in the short term.
There are currently dozens of cryptocurrency trading bots on offer. They range from free software that anyone can use to expensive subscription-based bots for professional crypto day traders. However, even the most popular cryptocurrency trading bots vary in quality, usability, and profitability.
Now that we are more familiar with trading bots and their contribution in the Forex Trade, let’s explore the contribution of Hosting Services to Forex trade.
Why use VPS for Forex trading?
A virtual private server is a special type of server which is housed on the same computer as several other virtual private servers—this is why they are termed “virtual.” Although they’re all located on one machine, they can operate independently of each other. You’re guaranteed a certain amount of space, RAM, and transfer allowance per month. Your VPS has its own dedicated power supply and offers flexibility, stability, and convenience. In very short, VPS is a cloud-based desktop PC.
What are the advantages of trading forex using a VPS?
- You can trade anywhere. As for those with a desktop PC and not a laptop, work can sometimes be limited to the location your computer is housed (your house/office). There are alternatives, but maybe you don’t feel like purchasing a mobile device or a laptop, or maybe your broker doesn’t support mobile trading. Perhaps you just don’t like the interface. In that case, you can connect to your platform from anywhere as long as you have a network connection where you can log onto your VPS to trade, even a hotel or internet café.
- Strong security. VPS systems offered by the best companies also come with the best security. Managed VPS servers are checked regularly to make sure that they are functioning, and most companies guarantee 99.9% uptime. You also generally receive antivirus and other tools to ensure your system is safe from vulnerabilities.
- Trade during of power outage. If you rely on automation for your trading, you can continue to trade even if your power goes out. If your automated system performs well even without you monitoring it, you can let it continue making money for you even if you can’t get online.
- Trade in sleep! Since you’re not confined to your desk and you can trade anywhere, and since your system can execute trades even if your computer is off, you can feel more comfortable trading even while you’re asleep.
- Reduced slippage and faster trade execution. This is one way in which a VPS server can benefit you even if you place all your entries manually and don’t use automated trading. A VPS can execute your trades more quickly than your computer because it is much faster transmitting the orders. The result is that you experience less of a delay and less slippage. As we all know, slippage costs money, sometimes a lot of it, so this is a great way to reduce your losses and unpredictability.
Also, by using a VPS in the same location as your broker, you’re able to open and close trades much faster than would otherwise be possible.
However note that the only time a VPS is useful is when you are relying on software to trade, or manage your trades on your behalf. Before going ahead with your Virtual Private Server, make sure you select one in a location that’s is closest to your broker.